Economists Propose Mortgage Debt Relief

Economists Constantin Gurdgiev, Brian Lucey, Stephen Kinsella, Ronan Lyons, Karl Deeter, Shane Whelan, David Madden, Brendan McElroy, Valerio Poti and John D Masson suggest a way to provide relief to stressed mortgage holders. 

151 thoughts on “Economists Propose Mortgage Debt Relief”

  1. While we’re at it, why not bail out my losses on Paddy Power?

    Somebody has to carry the debt. How is the taxpayer going to finance free houses for reckless borrowers, on top of bailing out the banks?

    People need to face up to the consequences and that means, in many cases, repossession. The repossessed can rent their former home or somewhere else (and the State ought to improve tenancy rights, in line with continental Europe).

    Otherwise, the moral hazard scenario will simply add more nails to the fiscal coffin.

  2. The economists fail to fully spell out who pays for this which is an absolute disgrace. The hole they suggest ‘should be filled with issue of more NAMA bonds”. What the heck does that mean – the way NAMA is currently set up suggests that part of this process will involve the banks taking another capital hit to be filled by the taxpayer via more public capital going into the banks. Is this right? Shambolic proposals – if well meant – do you nor us no service guys.

  3. @Tony Rooney

    The banks are trying to defy logic and common sense if they think that foreclosing at a cost of 100k on a property worth 200k which was bought for 300k is going to make them money.

    Negative equity impacts not just on consumption but also on unemployment via the fluidity of the jobs market. Even if unemployed homeowners were to emigrate following debt forgiveness it would be better than having them hang on by their fingernails here with no prospect of employment until all legal avenues have been exhausted.

    I will say I’m surprised the authors suggest an arbitration process instead of a blanket (but more expensive and necessarily more limited) form of debt forgiveness encompassing those keeping up with payments as well as those in distress. This would be complex, open to corruption, subject to legal challenge and so on. A scheme based on legally specified criteria would be preferrable.

    @simpleton

    The banks will take nearly all these losses anyway, only foreclosure will also tie up the courts and waste vast sums of money.

  4. Interesting list of authors, btw, both in terms of those included and those omitted. Anyone willing to hold up his or her hand and admit rejecting the proposal?

  5. I am confused. In one paragraph it is stated that ‘arrears of €10 billion would compare to total mortgage debt outstanding in the Republic of €115 billion . In the context of an overall bank bailout scheme of €50 billion and rising, it is relatively small’. In a later paragraph it is stated that the suggested formula would end up yielding ‘an expected total cost to the entire system of circa €37 billion to €49 billion’. On Morning Ireland a few minutes ago I think i heard Brian suggest a cost of €5-7 billion. The figure of €37-49 billion is close to the total cost of the bank bailout. Could one of the authors please clarify this for me. My gut instinct is that Simpleton is on the button with the use of the term ‘shambolic’. Please set me straight.

  6. I’m not sure I’ve understood the figures here properly.

    The authors of the debt forgiveness proposal first write that the total arrears of negative equity households are in the region of €10 billion (“Their arrears of €10 billion would compare to total mortgage debt outstanding in the Republic of €115 billion…” — paragraph 6), but further down they argue that implementation of their proposal “would most likely lead to an implicit writedown of at least 30 per cent of the more recent mortgage amounts on average, yielding an expected total cost to the entire system of circa €37 billion to €49 billion.” – para 12).

    While €10 billion is almost ‘peanuts’ by Irish standards these days, €37 to 49 billion certainly isn’t. Presumably I’ve misunderstood something.

  7. @Jim Power

    I see you got in there first — at least I’m not the only person with English comprehension problems.

  8. I am 41 years of age. I rent. I never bought a house because firstly I was priced out of the market by investors and then prices got so out of control that I knew it was no longer a rational market. I was prudent,I saved my money and I also upskilled myself during the celtic bubble. I can tell you now that if I have to pay to bail out those that effectively prevented me from owning my own home then I will emigrate and take my tax paying expertise with me.Sorry if Brian Lucy thinks that is begrudging but his answers to people like me are wishy washy and reckless borrowers will be rewarded for their behaviour. There is already a subsidy for landlords and rents are still to high as are property prices. This collective blame thing is really getting on my nerves.
    Give me a rent refund, I will leave and you can all deal with this crap yourselves.

  9. Have the authors of this proposal done their homework on it? If so, where is the reference to a paper or other independent studies that support their formula and provide assessments of likely costs and consequences? The last thing anyone in this society needs is another ‘back of the envelope’ devised solution to a pressing problem, even if it has the signatures of several eminent economists to back it up.

    As set out in the IT article, the idea is attractive. All one hopes is that the evidence is there to support it. Otherwise it will be quickly shown to have no credibility.

  10. I’d agree with Adrian Kelleher. If you’re going to do it, go for a blanket type approach. An arbitration process would end up being a bigger monster than NAMA. I doubt even Ireland would have the lawyers to cope.

    Anyone have a figure for the current ‘supports’ eg extended mortgage interest relief and subsidised tracker mortgages?

  11. @Brian
    I am as confused as Jim. I freely admit that my intellectual capital wasn’t much to start with and has probably depreciated to less than zero but can I humbly suggest that if people like me and Jim can’t figure out what you are saying then you haven’t done a great job on the old communications front?

  12. @Andrew

    All other supports to homeowners and the building industry (essentially the same thing) could be abolished in parallel with the initiative.

    Your argument is essentially the same as those against QE measures, but this isn’t all a zero-sum game. Mass unemployment is the greatest economic scourge of all and this country is in a depression. It’s not purely a matter of numbers; intangibles like consumer sentiment and labour mobility matter. This proposal would cost but it wouldn’t be a dead loss.

  13. @Jim @ Simpleton Do you agree that there is an issue with residential debt on the banks’ balance sheets? If so, how would you try to fix it? What’s your solution?

    @Andrew I understand your frustration completely–no one is saying people who took out mortgages should have their debt forgiven completely, and people who had their mortgages ‘adjusted’ by some mechanism would not be free to borrow willy nilly again, even if they wanted to.

    Sorry, running off to teach, back again later.

  14. @Brian, I see thre edifferent methods and three different figures. Which one are you suggesting? I am not trying to be smart, but i am genuinely confused. I also struggle with the notion that if there is debt forgiveness, this will just further undermine the capital position of the already dysfunctional banking system and this hole will just have to be plugged by the taxapyers. Have you any figures on how much of the debt relates to Irish and non-Irish banks? This could be an important consideration I think.

  15. Agreed the numbers don’t make sense but the problem is a major one as alluded to by MK several days ago. This will hopefully get the ball rolling further. Surely Irish citizens would prefer to help Irish people more than Irish banks.

    The point being made about the bankruptcy laws shouldn’t be lost amongst the whingeing about beds being made and sleeping in them; they are hellish and emanate from Dickensian times.

  16. By the way Brian I heard you say on the radio that we are already bailing out the bank bondholders and you would rather bail out your neighbour,or words to that effect. The POINT is Brian, bailing out the bank bondholders wasn’t right either and you want to compond this? two wrongs and all that! By the way have you any idea the level of re-mortgaging that went on for trips to New York,plasma tellys, bulgarian apartments? How do you propose to tackle this,not insignificant question?

  17. Even though I am fortunate not to be in the position, and probably stand to loose as a result of something like this, we all know someone in trouble. If the government can decide that Anglo was of systemic importance, I think we can also decide that 100,000 households are also of systemic importance. But for the love of god, as default and IMF look to be imminent transfer these loans back to the banks or to the government before that process starts. We have bankrupt households, banks and sovereign. Lets get one of those three sorted before the other two implode!

    JC

  18. Correct me if i am wrong. Most of these authors opposed NAMA on the grounds that it imposed a debt burden on the state that should have been imposed on bank liabilities. Yet this time the solution seem to me to top up that burden with NAMA bonds which yet again add to the tax payers burden.

    As if that was not enough it appears we need another Quango to arbitrate. Whatever happened to the courts?

  19. @Andrew

    These questions are equally applicable to income tax, public investment, social welfare etc. etc. The authors don’t make claims to fairness (although such arguments are relevant to first time buyers of the 2005-2008 period who propped up the entire pyramid), their appeal is to the enlightened self-interest of the nation.

  20. @Stephen. I totally agree that this is a really serious social and economic issue. I would love to come up with a workable and affordable solution, but I cannot identify any silver-bullet. You have to be commended for your efforts to come up with a solution, which i have failed to do. However, I am trying to understand what you are suggesting and how it might work, but i am not making much progress.

  21. You can either relieve the mortgage debts of the Irish middle classes so they can go back to watching Sky 1 and voting Fianna Fail, or else they will elect some National Socialist demagogue to relieve the debts instead.

    Either way, I don’t understand how you expect the Financial-Developer-Oireachtas complex to pay for all this.

  22. @Stephen
    So, new rules: only comments that propose an alternative are allowed? Sorry, if you propose, I am allowed to critique. It’s called discourse. Or free speech. Get over yourself.

  23. @authors of report.

    There is a simple solution to this problem. It still involves State/ Banks funds.

    If a person genuinely cannot pay the mortgage on his home. The State takes 50% ownership of the home. The State pays the banks 25%, the banks suffer the loss of 25%.
    The State remains 50% owner until the person sells the house or dies and has first call on the house sale proceeds.
    There would be a nominal rent on the State ownership portion of the house.

    I also had difficulty with the poorly explained figures between the total arrears and the extent of negative equity.

  24. @Adrian:
    I understand the greater good argument and societal issues vis a vis income tax and social welfare etc. My point is that Ireland is a failed entity and one of the main reasons for this is a corruption and fecklessness at the heart of irish society. The rule bending,cut hoor ethos that almost everyone is engaged in to a greater or lesser degree is the reason why we are an infantile country. For example if you saet up a political party and promised debt forgiveness you would probably win the election.People would vote for you. Why? For a better Ireland for all? Or just for themselves?The cycle would continue and the day of facing up to our responsibilities would be postponed again. Emigration would take the best people again, and the mé feíners would remain.

  25. @Brian,

    Could you summarize those three different methods for solving the negative equity tragedy together with the three different results and the three different cost estimates (ranging from 10 to 49 billion euros)? Just a couple of paragraphs. Most of us don’t have the time of day to practice advanced hermeneutics on your article. Or just tell us how much the Irish taxpayer will have to pay to implement your proposal. I’m not saying it’s a bad idea. But I’d like to know the price all the same.

  26. Jim. You and others are fixating on the US process-37b estimate. That IS NOT what we say do. And we don’t need lawyers. Gotta do day job stuff soon but feel free to ring me.

  27. I think it is a poorly written article as if fails to clearly answer the following three core questions:

    (1) What is the proposal?
    “we suggest some degree of individual debt forgiveness and restructuring” is much too vague. There are a huge range of options here – what was assumed when calculating the cost?

    (2) How much does it cost?
    Quite a number of people have found the figures confusing. I’m confused too.

    (3) Who pays?
    Mainly the Irish taxpayer I presume but there are also non-Irish banks in the picture here.

  28. I think the following issues need to be considered.

    1 It seems to focus assistance primarily in proportion to the level of negative equity rather than the basis of inability to pay. The latter is the basis for bankruptcy and debt resolution regimes in any other jurisdiction that I am aware of. Offering the largest bailouts to the biggest borrowers even where they could afford to pay more is a recipe for even greater fracturing of social cohesion.

    Is it also implicit that borrowers can both write down the loan and retain ownership of the asset the loan was used to purchase and also without upper limit? If so then renters and owners of small houses who cross subsidise their neighbours’ trophy homes will be even more aggrieved. They will not only oppose but, even worse, may also adjust their own repayment behaviour. This again would be contrary to international practice and at a minimum the issue would need to be clarified.

    2 In relation to moral hazard the piece correctly identifies and attempts to address the risks in incentives for bad behaviour by future borrowers but this misses the bigger immediate problem in an Irish context. The problem would be the effect on current (not future) behaviour as soon as such a scheme is implemented, or even begins to be discussed seriously. An increasing number of rational borrowers who have an ability to pay (albeit with some effort) will move to join the ranks of those in arrears. Any scheme not based solely around inability to pay (and with severe disincentives to participate except in extremis, probably including some form of bankruptcy) will have a positive feedback loop built in which will continually multiply the number of candidates for entry to the scheme.

    This may have a parallel effect of propagating the unrecorded cash economy as borrowers seek to put income beyond the reach, and assessment, of lenders or arbitratrors. Debtors (aided by advisors) will be very innovative when they realise that low penalty debt resolution packages are on offer, and such a scheme could quickly self destruct as both tax revenue and ‘onshore’ bank deposits erode. A side effect would be the same type of displacement of tax and legally compliant business, in the SME and self employed sectors in particular, by operations working “off the books” that occurred in the 1980s. This in turn reduces the taxable income pool out of which the bailout scheme must ultimately be funded.

    The financial regulator has indicated that revised bankruptcy procedures will soon be brought forward which I believe it would be more sustainable to support moves in that direction.

  29. I don’t follow what is being suggested either and that is not a dig at the authors. I would just like some clarification.

  30. Net wealth of Ireland before policy X
    Net wealth of Ireland after policy X

    Net foreign debt of Ireland before policy Y
    Net foreign debt of Ireland after policy Y

    How exactly does this create an improved environment to repair or accelrate the savings/investment balance in Ireland?

    This is pretty basic stuff isn’t it?

  31. I, too, am a tad confused, but I think I get the gist. However, what surprises is the apparent naivete that Ireland retains any sovereignty to address this matter – pressing and all as it is. Anything that might impact one iota on the precarious solvency of the banks that might be potentially solvent leads directly to Frankfurt. And anything that might require additional Irish taxpayer support leads directly to Brussels and its dictation of the parameters of fiscal adjustment. By all means seek to put voluntary arbitration arrangements on a sounder legal footing, but Ireland has lost its sovereignty to enforce solutions in this area.

    It is both tragic and ironic that so much effort is expended devising solutions to problems that Ireland no longer has the sovereignty to enforce, while serious deadweight costs and inefficiencies in vast swathes of the domestic economy – that Ireland retains to sovereignty to tackle – remain unaddressed.

  32. @Andrew

    Those are very broad issues and your scattergun solution of leaving those in negative equity to stew will hit the innocent more than the guilty. Do you accept that extracting debt in full is neither a necessary nor a sufficient condition for fixing all the problems you mentioned?

    @Geckko

    Consumer behaviour and labour mobility would be improved. Assuming this, it then becomes a positive-sum solution albeit one that will cost the exchequer money.

  33. @Brian “two different methods” yields two different results, is that right?; which presumably would mean two different sized holes to be filled (if not with NAMA bonds, then with something) is that right?… thanks

  34. @ Adrian

    “consumer behaviour would be improved” – that doesn’t mean anything.

    “labour mobility would be improved” – that is hardly a problem in Ireland and rank about 127 on the list of macro and microeconomic issues currently facnig this country. There are also more sensible way to address this even if it is a high priority (negative equity mortgages perhaps, something I have blogged on).

  35. @ Brian Lucey (and his co-authors)

    i think people are confused because you are not really suggesting a firm proposal or solution (other than a vague NAMA bond idea). Its more a mismash of ideas, with a mismash of costings, around the core idea of debt restructuring or forgiveness. But you don’t even point at what sort of metrics should be used to decide who can and who cant use this process? Possibly this is what happens when 10 authors get together on a one pager? Its a noble idea, but you have not suggested anything concrete, nor dealt with the downsides of the increased taxpayer burden (if its something more like the 10bn or 43bn). The current policy of a less onerous bankruptcy process, in combination with innovative ideas like Wilbur Ross’s on writing down debt in return for a call option on the house price rebounding higher, are far more concrete and easy to understand than your article today.

  36. @ Andrew

    I’m inclined to feel sympathy for you. Still though, this should be about moral hazard, not about the sick feeling of bailing out unwise investors. As the authors of the piece say, it is unlikely that moral hazard would be a major issue given how badly burnt everyone is.

    @ Paul Hunt

    I think you assume that the Europeans are a bit short-sighted. If they realise that big residential mortgage losses are on the way, they will see the sense in acknowledging the loss and writing off some of the debt. Since they have an interest in the overall wellbeing of the Irish economy (even if only as a debtor to them), they may consider a plan like this acceptable.

  37. @Paul Hunt

    In practise and in law, sovereignty resides in the people. All sorts of government measures were common in the 60s and 70s that remain possible today though many would require withdrawal from the EU or else drastic revision of its treaty provisions.

  38. @Geckko

    @ Adrian

    “consumer behaviour would be improved” – that doesn’t mean anything.

    Um, yes it does even if it was poorly phrased. Consumers would be encouraged to abandon the mentality that brought about the great depression of the 1930s.

    “labour mobility would be improved” – that is hardly a problem in Ireland and rank about 127 on the list of macro and microeconomic issues currently facnig this country. There are also more sensible way to address this even if it is a high priority (negative equity mortgages perhaps, something I have blogged on).

    It is a significant issue and will increase in importance with time. Both employees’ ability to take up positions in locations other than where they live and employers’ ability to find ideal candidates would be improved.

  39. For the past 12 months I have been working in the UK for 4 days a week (my employer looks after the tax equalisation) in order to pay my mortgage in Ireland (purchased 2005) plus rent over there (plus flights, car hire etc).

    Would I be better off staying at home on the dole and undergoing some form of “debt forgiveness” ???

  40. I would suggest a more elegant solution that should not hurt the banks too much, does not call for huge subsidy and does not let people off the hook.

    Idea as follows:

    In relation to a person’s principal private residence the bank’s recourse should be limited to:
    1. The sale proceeds of the house or reposession thereof
    together with the greater of:

    1.1 The person’s net liquid assets/savings, and
    1.1 €15,000 to be payable over three years on foot of a personal loan for that amount, and
    1.2 35% of the mortgagees net earnings over the next three years payable by monthly installments (effectively an agistment order)

    BUT the additional sum subject to downward adjustment for hardship by a new division of the the District Court or by a specialist tribunal including people with banking experience (not the morons in the PRTB).

    This would require no new bonds and no new institutions other than a tribunal or a Division of the District Court. The banks would not get much less than they will get anyway.

    In the future, all home mortgages should be non-recourse. Florida allows recourse to personal assets and it has the higest default rate in the USA so it won’t affect the banks in the future.

    I would also suggest that there is reform (for future loans only) to prohibit banks from obtaining personal guarantees from directors of companies save in very limited circumstances. Personal guarantees are a sham protection for the banks but they do enormous damage to an economy’s capacity to recover. The value of the banks is that they provide finance to people. There is no point in keeping your banks alive at the expense of making everybody else insolvent.

  41. @Tecumseh
    Remember Nama is effectively a debt forgiveness programme for big borrowers and their dole payments are typically €200k+. On top of this, some of them are emigrating to protect their assets. Is this any more fair than a scheme to assist distressed mortgage holders?

    Nama is acquiring about €74 billion of loans and seeking repayment of about 50% of them. Although it claims that it will seek full repayment, it does not even include the original value of these loans as debtors in its balance sheet.

    For a more detailed discussion on this and letter expressing my concerns to EU Commission see http://www.planware.org/briansblog/:

  42. You may qualify for the UK personal insolvency regime which is much more progressive than ours and sometimes allows people to get out of jail ofter a year or two. I suggest you check it out.

  43. @ Adrian.

    Are you seriously claiming that not only would this policy not potentially increase moral hazaard, but would reduce it??!!??

    The very first type of onsumer behaviour that would be stimulated would be household in “negative equity” rapidly rearranging their circumstances in order to profits from this potential windfall.

    That is the big immeditate moral hazard problem. And they extend bweyond that to everyone in society observing how in Ireland there exists a society that allows an ex post abrogation of risk.

    The more people here probe the signatories on this the less credible it sounds.

  44. @ Adrian,

    And regarding labour mobility. I can tell you that it will certainly affect my mobility. It is 100% certain that if this massive arbitrary wealth transfer policy comes to pass I am going to relocate my not insignificant productivty to Switzerland.

    That isn’t a joke.

  45. A few points, – I have not posted on this forum before but I feel the following is worth mentioning. Firstly fair play to these guys for finally stating the obvious and speaking the truth about the mortgage books of the banks. Anyone with even a cursory knowledge of the situation knows that there will be massive losses on these mortgage loans. As Morgan Kelly eloquently outlined a few days ago, these losses are going to be highly significant.

    2) Because we have a de-facto nationalised banking system, these losses are going to fall on the Irish taxpayer and not on some foreign bond holder (as they should have).

    3) Accepting that we have a problem it is imperative that this problem is addressed. We have to outline the scale of the borrowing, it is approx 50 bln, of which it is safe to assume that 1/3 of this is unlikely to be repaid. So we are taking about total debt forgiveness of 10-15 bln euro. Here is how I would do it. Take 5 bln from the NPRF and remove tax reliefs on pensions for 18 months. This will raise 4.5 bln euro. So you now have a total of 9.5 bln euro with which to write down the value of these mortgages. It is not a perfect solution, but there are few others.

    4)To anyone talking about moral hazard — frankly speaking it is a bit late in the day for talking about such a concept. The idea here is to get people to become economically productive again, rather than bankrupt. The longer we leave and ignore this problem, the worse it will become.

    To all the people criticising this article — 1) do you accept that there is a problem? If yes, what do you propose to do about it? Going through the courts and our draconian bankruptcy system is not a sufficient rememdy given the costs involved and the size of the problem. As taxpayers we are going to pay for this one way or the other, better to face up to it now and get on with life. For the record I am not a property owner.

  46. @ Tecumseh,
    Would I be better off staying at home on the dole and undergoing some form of “debt forgiveness” ???
    you might be.

    or..consider the possibility that through your hard work you manage to save the 500K needed to clear your mortgage (for example).

    should you give it to the bank to pay off your mortgage? or should you keep it in an account for your personal use?

    the slightest possibility of debt forgiveness might mean that youre better off hanging onto the money yourself.

  47. Not an economist so go easy on me.

    Has there not been enough bail outs?

    A 21st Bankruptcy law is the only way to go.

    Can’t pay mortgage. Bank takes house. €100k shortfall is banks concern.
    Home owner is free of this debt but cannot borrow for 5 years.

    Banks will take the hit but they are going to 1 way or another.

    Sooner housing market hits the bottom and homes are affordable the better. Confidence will improve then and those burdened by debt can get on with their lives.

  48. Adrian Kelleher Says:

    “Negative equity impacts not just on consumption but also on unemployment via the fluidity of the jobs market.”

    I think the “success” of the car scrappage scheme somewhat knock your arguent on it’s head re consumption. Given the high marginal propensity to consume imports in this country, why should we be rushing (again) to encourage this “consumption”.

    Such was the demand for tickets that Take That “a pop band my l’ud” put on an extra nights concert in Croke Park. Hardly a sign of a return to 1930s austerity.

    A survey earlier this week stated that we would be spending a the second highest amount on Christmas presents after Luxembourg,

    Re “the fluidity of the jobs market”

    We’re not living in the middle of Alaska. There are flights to Manchester from Knock and loads of Irish people can make their way to sporting events etc in Ireland.

    Is Karl Deeter an economist, no he’s a mortgage broker.

    I hope the Commission knocks this on the head.

  49. @Geckko

    I made no claim the initiative would reduce moral hazard.

    Sneery mutually-congratulatory sniping helps nobody.

  50. Again, I haven’t thought this through in detail, but my gut reaction is very similar to Andrew, Gekko and the “begrudger” on the radio this morning.

    I’m old enough to have been chased out of Ireland by stupidity 20+ years ago. This seems like a straw that could drive me out again. Will I get a rent refund, or a bailout for the company I invested in that didn’t work out, or for any of the other stuff that was at least plausibly a good investment but which didn’t work? If my investment wasn’t a PPR, which it wasn’t because they were so obviously overpriced and such obviously bad investments, then I’m just doubly scr**ed I guess.

    Even worse, suggestions that my attempt to catch up on pension savings (they’re hard to make in a dying dotcom so I need to play catch up) ought to be taxed to pay for someone else’s house while I still can’t prudently afford to buy are particularly unamusing.

    I’ll probably calm down and have more rational response when I have a chance to read and think later, but for now the reaction to some of the suggestions in the article and on this thread is wildly not positive. As I’ve said before in other contexts, as long as taxes are being knowingly misspent – which they are – then taxation has no more moral validity than burglary. This looks to be the same, but wrapped up in even more nice neighbourly terminology.

    “Wealth transfer” is a polite term. I’m tempted to use the b word.

  51. @Jim, Carolus

    The 10bn refers to current arrears, the 49bn refers to the likely cost of renegotiation and must assume that there will be many who are not currently in arrears, but deep in negative equity, who will be eligable for renegotiation.

  52. I realise the Irish Times Opinion page is perhaps not the place for closely knit arguments, but the degree of handwaving, special pleading and rank entitlement in that piece is off the scale…to the extent that I’d have to ask: how many of the authors are homeowners? how many in negative equity? Cui bono?

    The conflation of negative equity and arrears, as if they are the same issue (rather than merely correlated) is weird. The almost complete lack of focus on the incidence of the costs of such an endeavour is staggering; the handwaving references to NAMA and the ECB hark back to the FF spin game when NAMA was being rammed through in the first place, as if NAMA is some sort of magic pot of gold at the end of the rainbow.

    Of course, the problem is huge. But using taxpayers’ money to prevent house prices clearing is not the basis for sustainable social or economic policy (albeit a sure vote-winner based on voting patterns of homeowners vs others). The implicit suggestion that German taxpayers pay is (a) cute hoorism of the worst kind, (b) if enacted, likely to be clawed back with interest down the road.

  53. @ Adrian,

    It is hardly self congratulatory sniping. You need to avoid making through away statements like “consumer will behave better”. It doesn’t help an exchange of opinions.

    You and the proponents of this plan need to make a much much stronger case for what would be the largest arbitrary transfer of wealth within Irish society, ever.

  54. @ Bazza

    no, the 10bn is the nominal mortgages on which there are arrears (60k houses at 166k mortgage), while 500mio is the actual amount of arrears. It was another poorly phrased line which has increased the confusion.

  55. @ Brian Lucey,

    Could you elaborate this bit of magic: “The losses that will be crystallised in the banks can be filled with additional Nama bonds”?

    Are you saying NAMA buys the mortgages at a discount and pays with namabonds? This would still leave a whole in the banks’ capital. NAMA can’t issue bonds on the amount written down as there is no receivable.

  56. the basic benefit of debt forgiveness its: it will force the loss into the bank balance sheets that should have been there all along while reducing the debt issues that are freezing up households. If you are willing to say that borrowers should face their loss because they borrowed then equally risk instrument holders (bond holders) should face any reasonable loss they have signed up for by underwriting the loan to the bank.

    Sadly, the state via the Regulator has created a situation whereby the bank cant’ take the property back (nor does it suit them for that matter as it would mean acknowledging the loss) and they have inserted ‘tax payer general’ into the void where they have no business being, because there is already a natural order of people who have chosen to be in that space to take loss (and gain) where appropriate – equity, preference shares, mezz finance, sub-ord, LT’s and finally Snr/Depositors.

    Why let people stay in a property rather than turf them out? If we are going to apportion loss where it belongs then the cost of this is measured by net spending over and above that – and moving people/providing alternative accommodation or other means is costly, so why bother if you can get the debt to a point where they can service it?

    In this process your credit score should naturally be ruined for a decade, that is part of the price you have to pay, and there should be no second chance at a write down, the question is: which constituency do you wish to serve? bond holders or households

  57. I think Morgan Kelly’s predictions about civil strife due to mortgage relief were spot on! Defining rules where some amount of relief is calculated based on an arbitrary function of negative equity, inability to pay, size of loan etc is going to produce winners and losers, perhaps living in the same street. The authors need to sketch out something more concrete as an example which can be seen to be fair, and which I think is going to be difficult. A good number of scenarios have already been given showing moral hazard, incentives for bad behaviour and boosting the black economy.

    An approach based on a streamlined process to sell distressed properties (e.g. short-sales as used in the USA) and modified bankruptcy procedures (e.g. as outlined by zhou above) has a more realistic chance of success and being seen as fair. Of course a lot depends on the details, and the tax payer will still end up paying a good amount.

  58. @Adrian Kelleher
    “Only if any scheme that actually arose discriminated against those who kept up their payments.”

    but you also have another category of mortgage holder. someone who will go to whatever lengths necessary to clear their debt by overpaying if necessary.

    Wouldnt any debt forgiveness scheme disincentivise any efforts to overpay or clear a mortgage. ?

  59. @ Ron

    correct. I have a decent bit of cash saved up, and was going to throw it at the mortgage now that i have come off the fixed rate last month. This suggestion makes me think twice.

  60. I am one of “those people” who got carried away in the boom. I have mortgages to the value of 1.3m on 4 properties. When I bought my last one, our family home at the peak we had a LTV of 68% on everything, and roughly 150k in other assets and savings. Banks were falling over themselves to lend to us.

    My savings are now gone and I am now in negative equity on every property, our rent roll has collapsed and we are just about servicing our debts and keeping our business open.

    I don’t agree with debt forgiveness on mass, people who can no longer afford the homes that they have should lose them, but that should be the end of the story, introduce a retrospective non-recourse rule on all property loans. Allow people the dignity to hand back their properties to the banks, dust themselves off and start again.

    The banks/ state could look to rent the property back to the individual to achieve the “Long Term Economic Value” of the property at a later time. A lot of these people are on Tracker Mortgages, the banks might be happy to get some of those off their books and rather than have a non-performing loan as a “risky” asset on their balance sheet they would have a property with a tenant.

    On the other side of all the loan applications that were submitted and approved in this country was a banker with a risk department calculating their risk, Blame should be shared. People should be allowed a way to start again, we need an engine in this economy, that engine is all those people caught in this trap.

  61. @ the Authors

    I agree that we need to do it but only if accompanied by large default and massive austerity.
    Otherwise,
    Where do we get the money or credit to do this?

    If all you are suggesting is tranfer of debt from mortgage holders to the tax payer where do we get the money to afford it?

    If the answer is nama then arent you forgetting that there will be no Nama for the little guys?
    You are also presuming that the ECB will allow us to do this through Nama.
    Rather big presumption that. Who will guarantee our promissory notes?

  62. Karl,

    It is just a transfer.

    Don’t get yourself confused when looking at what this will do to “Irish banks balance sheets”.

    We will simply be novating this debt into a nation debt, which isn’t recorded on the bank blaance sheet but our national one. Yours becomes mine in effect.

    In effect, if you and I trade off a situation where you have overbearing debts and I have few, to a new one where we both share the combined debt (this is what is being proposed), together we will:

    – have no more capital available to us collectively
    – have no greater rate of saving collectively

    What might happen is that you might feel free to take on a bit more debt again (which would increase our available capital), but that is exactly the opposite of what Ireland needs.

    There are too many people in Ireland searching for the free lunch. Either we take a gamble and default on our foreign debts or we just knuckle down and work and save for the next few decades, or more likely a combination of both. Those are the only ways to address the real problem – lifting ourselves out of our grossly indebted position.

  63. @ authors
    I think the message you really wanted to convey is that you care. Most of us do to be honest, but I really think there is little useful content in the article. Perhaps the predictable forum you chose to show you care is too limiting to set out a plan in detail.

    @Brian Flanagan
    I’m sorry to bring this up in this thread, but I’m tired of seeing it here and hearing it on RTE ad nauseum. Could you please explain how NAMA is a debt forgiveness scheme for big borrowers?
    Now maybe I’m wrong, but it strikes me as a stupid statement.
    It is unfortunate that our laws allow all borrowers transfer assets to their spouse’s name, but those laws have nothing to do with NAMA.

  64. @eoin

    Yes, you are right … what I meant is that the 10bn refers to (mortgages in) arrears and the 49bn refers to the mortgages that would be eligible for renegotiation.

  65. @Geckko

    Economies possess more than one equilibrium state, a fact Keynes identified qualitatively but which is poorly understood quantitatively. One such equilibrium was the great depression, as was the US depression of ca. 1870-90. These events cannot be described algebraically by economics because economic models are rely either on simple pictures of human behaviour or are mere exercises in curve fitting or both. Real humans’ economic behaviour cannot be mathematically described.

    The statement you refer to and which I have already clarified once stands on its merits. It’s a simple borrowing from Keynes, a man whose ideas can be put to uses both good and bad. If you object to Keynes in principle, please state so now.

    There’s nothing arbitrary about the proposed measure, nor is it even a transfer of wealth properly speaking unless the provision was very large as the banks have no hope of ever extracting this cash from bankrupts. As with Zhou, I would have my own design for dealing with the issue. Breaking the moral hazard issue into two parts, that past and future, the period -2008 is already past and a well designed scheme could neutralise the risk of people working the system. The specific alteration I suggested in my first post would contribute to this.

    The state conspired with banks, estate agents the print media and supposedly ‘independent’ institutions such as the ESRI to engineer this disaster. People were mislead. On Apr 13th 2006, Brian Cowen said that “the buoyancy of the housing market primarily reflects the innate strength of our economy’s performance over the last decade or so”. The scheme proposed, or something like it, is very possibly a legal duty of the state.

    I wonder if those who find capital transfers so appalling ever received mortgage interest tax relief or government largesse in any other form. If so, their objections are situational rather than principled. For the record, I would not benefit personally from this measure and nor would anyone in my immediate family.

    @Jimmy G

    People making their way to sporting events is not the same as commuting.

    @Ron

    Here’s what you wrote initially:

    or..consider the possibility that through your hard work you manage to save the 500K needed to clear your mortgage (for example).

    should you give it to the bank to pay off your mortgage? or should you keep it in an account for your personal use?

    the slightest possibility of debt forgiveness might mean that youre better off hanging onto the money yourself.

    Now this may be correct or equally it may not be, depending on the nature of a given scheme. As I stated above, my preference would be for a scheme that did not discriminate against those who kept up their payments. This would eliminate one source of gaming. Other sorts of unintended consequences could equally be eliminated with a well-designed scheme.

    I feel the category of those who bought in the 2005-2008 period, are now in negative equity and are either overpaying or have cleared their mortgages is so small as to be not worth considering prior to drafting a final proposal.

  66. @Geckko if you write down assets and adjust liabilities accordingly (going through the order listed) then it is a case of ‘who holds the bonds that are getting written down’, the transfer is from debt instrument holder to household. Transfer yes, but not nationalization of that necessarily.

    The idea of the collective position is like the paradox of thrift, but this isn’t a tax payer subsidized scheme, it is one where (like in any business) you work down the line until assets = liabilities, currently our assets are a false reading meaning our liabilities are already at a point where they should be reduced, and the way to reduce them is to initiate a credit event for the bank. The markets have already abandoned them, this will just be coming clean more than anything, many holders even have insurance in place for this outcome.

    Lastly: if your credit score should be ruined for c. 10yrs as part of the deal. I agree that we need massive cuts, that we need to do the heavy lifting of saving again and borrowing less, but it seems to me there is a free lunch at present, namely the coupon on Mezz, SubOrd1&2 and LT1&2 bonds and to a far lesser degree on senior debt, so balance it out.

  67. Re: Adrian Kelleher Says:
    “Jimmy G

    People making their way to sporting events is not the same as commuting.”

    Where are the jobs that the 400k plus out of work are preventing from going to because of negative equity?

    Re: Karl Deeter Says

    In this process your credit score should naturally be ruined for a decade, that is part of the price you have to pay?”

    Do you really think the bandwagon started by the Sindo et al and promoted by yourself et al in this proposal will stop at Mr and Mrs Canny McSavvy being prevented from lumping themselves (and by extensnio if this goes through the rest of us) with debt?

    The next cry will be that it “isn’t fair” to impose a ten year curfew on them. After all one once the debt of these Savvies has been loaded on to all of us from them (the hard bit at present), the next cry is that they should be allowed to “normalise” their affairs.

  68. Karl,do you remember writing the following? Maybe you should go in to politics?

    “debt forgiveness is INSANITY! the money will have to come from somewhere, so we’ll take it from health or schools or somewhere else, you may as well bring out a new 5% automatic levy on everybody because this is not something that will save the economy, it will just be a re-distribution of wealth, it will steal from savers and the prudent and reward those who can’t/won’t pay their loans back!

    And what is going to be achieved from all of this? Firstly: loss and hardship for those unconnected to the event, secondly: we reward people who can’t pay their debts – that will just ensure they do the same thing again!

    debt forgiveness doesn’t ‘make sense’ unless by ‘making sense’ you mean having less money for education, health, social projects, infrastructure and other vital state services. The disaster here is that nobody is asking the simplest question of all — where is the money to do this going to come from?”

  69. Brilliant spot Andrew

    It was only a few months ago Karl was on the frontline arguing against debt relief and for a speedier resolution regeime.

    And the question on the lips of Jim Power, Enda, and lots more is the same one you make
    — Where is the money to do this going to come from?
    You and the authors need to answer that.
    Is this an Enron accounting trick you guys are trying to pull?

  70. @ Andrew: ““debt forgiveness is INSANITY! the money will have to come from somewhere,”

    No andrew. You must try to understand what money really is! Debt is REAL, so you MUST use REAL money to pay debt down. Think matter v anti-matter. When they meet POOFFFF! Money is destroyed => deflation. OTOH – canceling debt – Bingo! You have some real money for real things!

    The mortgage originators are primarily responsible. They were (very allegedly, you understand) the experts. They had Credit Risk Depts and conducted thorough Due Diligence on eacvh on every maotgage application to ensure that the prospective mortgagee had the income to sustain the debt load they were contemplating. They (the originators) DID do this ???? Oh dear! Seems ‘they’ neglected their fiduciary duty. No worries. Now Mr Woods, could we have the keys please? No! No! No! “From my cold dead hand . . .”

    They (the originators) abandoned the Iron Law of Mortgages – look it up. When you abandon an Iron Law – the consquences are, well, unpleasant.

    Cram-down must come. Cheers.

    Read: Wealth, Virtual Wealth and Debt: Frederick Soddy. Difficult to source, but key insights relative to debts.

    Disclosure: No mortgage debts.

    Brian P

  71. Karl,

    You aren’t making any sense. Any capital required to replenish Irish Banks is coming from taxpayers (incontrovertible fact) and is almost certain to do so for the foreseeable future. don’t believe the most recent (of a number) of guarrantee extentions is the last.

    If you are indeed explicitly recommending a repeal of the bank guarrantee scheme and hence implicitly putting all Irish banks into adminstration then it isn’t clear in the letter.

    As proposed by you co-signatories this is simply a mass wealth transfer.

    Zero macro economic effect. This is basic stuff in economics.

  72. @Brian Woods
    You are attributing that quote to me. It was Karl Deeter who wrote that hence the quotation marks. Now Karl has done the proverbial U-turn. Pay attention Brian.

  73. This idea might be pure rubbish but how about we turn the mortgage crisis into a 5yr in total back-dated competition with rewards for performance in these years that are subsequently annually revised based on performance in the years after the initial 5yrs. This might look like the following:

    > Starting at 01/01/2008 through the present day and until 01/01/2013 the mortgage payments are made to the best of people’s ability and this is recorded as a percentage of the nominal amount i.e. full payment = 100%
    There are no repossessions allowable in this period. (not sure how this would affect the actual repossessions that took place in the 2008-2010 period).

    > If peoples scores are below 40% (Leaving Cert fail) on the 01/01/2013 then repossession takes place and they will be in the hands of the social services who hopefully by that stage will be able to make imaginative use of NAMA property. Further competition within this group in repayment will influence the quality of social housing that they receive. People more qualified than me can decide how multiple residences fit into this.

    > For those that rank above 40% they remain in their house and a panel of experts devises an increasing list of penalties from 0 at 100% to fairly draconian at 40%. This sliding scale would involve restrictions in the form of access to credit, ownership of certain assets, and ability to hold down certain roles. This can be revised at the end of each subsequent year on the basis of the repayment performance within that year.

    There are obviously loads of details missing here but maybe something along these lines might provide a structure for experts in this area to work from?

  74. @Jimmy G

    Your point has no substance. That negative equity causes unemployment is common knowledge.

    @Andrew, Eamonn etc.

    You seem to assume the banks will be able to get this money off of people if the government doesn’t help them out. A bank holding the deeds to a 300k house as security against a borrower owing 200k has leverage over that borrower. Where the security is only worth 200k and the loan is 300k, the borrower has leverage over the bank.

    Anyone who thinks that a little debt trouble for a minority of the population is the limit of the current crisis has no imagination. The more I read, the more I think Morgan Kelly’s premonition of the rise of a hard-right party may be correct. The IMF is not the worst case scenario — that would be a generalised LA-riot style event.

    What would happen if Ireland, Spain, Portugal, Greece etc. just started dropping out of the global financial order one by one? In 1913, the United Kingdom and the German Empire found a rare moment of entent when they jointly occupied Portugal to extract debts due. Sending in the tanks isn’t really imaginable nowadays. People wanting worst case scenarios should broaden their imaginations a little.

  75. @John Doran.

    Thanks. Obviously you are a pro. You have got to the heart of the matter — namely the unintended but inevitable adverse consequences of debt forgiveness. I’m quoting the key passage from your posting, since there are so many comments here now that it’s possible many readers have overlooked it:

    The problem would be the effect on current (not future) behaviour as soon as such a [debt forgiveness] scheme is implemented, or even begins to be discussed seriously. An increasing number of rational borrowers who have an ability to pay (albeit with some effort) will move to join the ranks of those in arrears. Any scheme not based solely around inability to pay (and with severe disincentives to participate except in extremis, probably including some form of bankruptcy) will have a positive feedback loop built in which will continually multiply the number of candidates for entry to the scheme.

  76. @ Adrian,

    WRT Keynes, Ireland is NOT in the midst of a profits, or Keynesian recession. We are not simply awaiting some kick start to the investment-output-income cycle. For a better explanation of our predicament I suggest you consider Ramsay – multiple dynamic equilibria and adjustment paths there also plus some explosive ones to boot.

    A netting out of our debt between ourselves – a wealth transfer – is no credible policy for this country.

    And if a policy that, writes off the debt of one section of society financed by all of society or some subsection of society isn’t arbitrary, I don’t know what is.

  77. Whatever about the proposal, it is clear that our laws on personal insolvency are at the root of a very serious problem. Every politicial party should be challenged to promise draft legislation by Easter with legislation to be enacted and in force by the summer.

    Also, I am disappointed that nobody has commented on my far superior proposal of limiting recourse to the property value plus an amount calculated by reference ot the borrower’s income 🙂 . I have additional bells and whistles in mind to deal with the mechanics.

  78. BTW I think the idea as posited in the article will give people false hope and will causing additional problems for banks. There will be no home-owner bail-out. Limiting recourse is the max that is available to us.

  79. I don’t think it’s possible to assess what (if anything) should be done on mortgage relief in isolation from the legal questions. To what extent did the banks etc. violate regulations or the law in selling residential mortgages during the boom years? And if there were such problems, or if the banks simply let their mortgage paperwork slip, then to what extent does this endanger the banks’ legal right to repossess houses and so on? Obviously these things are closely intertwined with the matter of how a mortgage-relief scheme should or could operate. For example, householders are likely to shun the offer of a binding arbitration if they’re hopeful of getting a better outcome by challenging their mortgage in court; while on the other hand, bundling homeowners into a binding arbitration (whether by persuasion or by force of law) is likely to be a grave injustice if their mortgage is, in fact, defective and they would have been much better off going to court. This is another case where it would be great if this blog could somehow attract more input from lawyers. (That’s not meant as a demand for better service for my money!)

    Of course now someone is going to tell us don’t be daft, the Irish banks’ mortgage holdings sit on a rock-solid legal basis. Maybe: and it does seem to be the case that most Irish mortgage claims weren’t thrashed all over the continential United States by complex financial instruments. But I would be slow to take the reassurance for granted. First, because apparently it’s the case that atrocious paperwork and shady dealing (and deliberately atrocious paperwork in the service of shady dealing) are prevalent at the height of most gigantic asset bubbles. Second, because of our track record. It’s fortunate indeed that Bill Black is in Kilkenny this weekend. Someone should certainly ask him how he’d appraise our DIRT scandal – where senior bank managements were actively uninterested in what was happening at branch level – in the light of his study of “control fraud”. I’m confident that our banks did indeed learn lessons from the DIRT saga – I’m just not sure what lessons. Of course, since Black also has a lot to say about the current legal situation in the US housing market, it will also be very interesting to note what he has to say about how things stand here.

    (Speaking of which, let me roll out my little campaign again: Bill Black for Director of Corporate Enforcement. If you want to see important people going to jail over our banking crisis – and not just the divil Seanie and one or two other designated scapegoats all from Anglo, either – then Black is your man. As one of the people who resolved the ’80s S&L crisis in the US, Black helped to secure a large number of prosecutions of senior businessmen, in the teeth of serious political (and ideological) opposition. I also have an idle hope that Black might be interested in the job as a way of raising his profile in the US. Attention opposition parties! (Or indeed Government parties if they’re so inclined.) Promising to install Black as DCE would probably be a very popular campaign pledge come the election. Someone really should approach him and ask if he would give serious consideration to a serious offer of the job.)

  80. I like Gurdiev

    but I think in this case hes looking after own behind

    didnt he recently admit that he is deep in negative equity poop himself

    smells fishy this whole pond

  81. maybe we should go for this option.Actually punish those who were prudent. This is from a person who advised people that the banks were well capitalised and safe on Sept 16th 2008 and has a consumer advice website and has since been appointed to the advisory panel on mortgage debt. This is the upside down and hypocritical world of commentary in this country.

    http://www.askaboutmoney.com/showthread.php?t=146453
    Originally Posted by Brendan Burgess
    The people who benefited most from the extension of the deposit guarantee were the depositors in the guaranteed banks.

    So charge all those depositors on the night of the guarantee 10% of their deposit in excess of €20,000.

    Charge those in Anglo and Irish Nationwide an additional 40% as they would have lost everything.

    It wouldn’t apply to deposits in Credit Unions, although Credit Union deposits in Irish banks would be subject to the same deduction.

  82. @Andrew

    Well if the opinions of an unrelated person, Brendan Burgess of all people, on an unrelated matter aren’t a strawman I don’t know what is.

  83. @Brian Woods,

    You correctly ascribe primary responsibility to the mortgage originators. But this does not solve the question: what are we to do now? As John Doran has pointed out, even to think about thinking about debt forgiveness will have a negative cascade effect. Besides, virtually all of the country’s debtors will be tempted to rationalise defaulting on the grounds that they were, after all, ‘duped’ by their wily or naive creditors and that — since bad debt is nobody’s fault — it’s everybody’s fault, hence ascribing a kind of Kollektivschuld (‘collective guilt’) to the Irish people. Or rather to the taxpayers among the Irish people.

    Being a passionate Georgescu-Roegenist I much appreciate your deference to the immortal Frederick Soddy. But you are wrong in concluding that cancelling debt will lead to the creation of ‘real money for real people’. Cancelling debt means only that somebody else will have to foot the bill. The entropy law notwithstanding, answering a fool according to his folly is not the best medicine.

  84. @Geckko

    Just claiming it’s arbitrary over and over won’t make it so, any more than capitalising ‘not’ will make it more negative. Arbitrary means without rationale. I’ve stated my rationale and won’t speculate as to those of the authors.

    It is a fact that people are saving heavily and also that they are in fear of losing their homes or jobs or both. Reassurance that these eventualities wouldn’t leave them still in a state of debt servitute for decades in the future would be healthy — and yes, a Keynesian recession is a recession of depressed demand.

  85. @Andrew Nov 11th 9.04
    Completely agree. We need a cultural change which might be achieved when we get a generational change.
    Adrian Kelleher
    November 11th, 2010 at 9:45 am
    The Elephant in the Room is the E.U and the Euro. Ireland is a region of the EU rather than a sovereign state.

  86. @Adrian
    My point Adrian is that there is a climate out there that seeks to absolve responsibility for some and punish responsibility for others. There are zero consequences for these people and debt forgiveness is more of the same.

  87. With so much money going into mortgages at present, this will put the Kaibosh on any increase in growth.
    And it is growth that has been identified as the crucial need for the Irish economy?

  88. Every one of the contributors in the Irish Times are keen advocates of the Free Market. Now that the Free Market has failed big time we should socialise the loses. Sorry Guys, you lose. I am with the other contributor on this blog in that I listened to David McWilliams and Morgan Kelly and saw the whole scam for what it was. We took out a 23yr mortgage based on 3.5 times our combined salaries. I drive a 00 car and play by the rules. People who I went to school with who had,nt two brain cells to rub together were driving around in Range Rovers and living in trophy houses. The range rover is gone but still has the house, just about and now you suggest I bail him out. Forget it, last one leaving turn off the lights. It has to be the maddest idea I have ever heard.

  89. @Marian

    Can I refer you to this link
    http://www.planware.org/briansblog/2010/05/nama-is-bailout-for-builders.html

    “It is unfortunate that our laws allow all borrowers transfer assets to their spouse’s name, but those laws have nothing to do with NAMA.”
    IMHO, this law is a good thing but it can be abused when it enables defaulting borrowers move sunstantial assets beyond the reach of their creditors (such as Nama) as appears to have been happening.

  90. @authors
    You are right to highlight this as an issue and outline a proposal to address it. However, John Doran is right that it has to be structured so that it does not draw ever greater numbers of people into it. It also seems to me that you are assuming in your calculation that negative equity won’t increase further (i.e. house prices won’t drop any more)? NB Although banks are currently more restrictive on new mortgages, they seek independent valuations – from members of certain professional bodies of auctioneers and estate agents.

    @MarcusOC
    Lots of people in the UK property market were terribly badly burnt in the late ’80s. This time it WAS different: it was much worse, and many could not even countenance how far we had overextended ourselves.

  91. Aine Ui Ghiollagain Says:
    “@MarcusOC
    Lots of people in the UK property market were terribly badly burnt in the late ’80s. This time it WAS different: it was much worse, and many could not even countenance how far we had overextended ourselves.”

    What’s with the “we” paleface.

    Is this the Royal “we” or the bunch of stooges that “we” can lump our troubles on?
    I didn’t hear anywhere in dispatches where “we” wanted CGT to be introduced for the PPR, to prevent flipping of the “we” who wished to advance up a mythical object called the property ladder.

    The idea that someone living on a social welfare widows pension and carer’s allowance only should have their rates cut while “we” are bailed out for greed is an abomination.

    I heard on the radio last week a barrister explaining that a couple (one a teacher the other a lecturer) on over 100k per year on a 600k mortgage couldn’t be expected to pay off that mortgage.

    Well I expect that should. Their post tax pay is c. 75K (back of envelope calculation). Their mortgage is say 100*6*12 (based on 6k per 100k per 12 months) or €43,200 pa leaving a post mortgage pay of almost 32k (31,800). I’m not allowing for mortgage interest relief in this calculation.

    Under the Croke Psrk agreement these people’s pay can’t be touched but the aforementioned widow and carer can. Get a grip.

  92. @ Andrew: Thanks for the correction. Sorry if I upset you. Brian

    @ Carolus Galviensis: Thanks for comment. Will compose a reply when I get home and I can read some more of the comments.

    Brian P

  93. In reference to my skeletal idea above I think the idea of a start date of 01/01/08 should be discarded and payment history back-dated to the start of the mortgage. The original nominal schedule of payments doesn’t change throughout the repayment period (e.g. 20, 25, 30yr mortgage) so there is no penalty interest accruing. In this set-up it is considered that real debt forgiveness will be postponed until well into the future and only after a sliding scale of hardship has been experienced. If houses in negative equity are sold in the interim then this can offset the schedule payments and improve the overall payment % but the remaining debts stay with the person until the end of the term.

    So say the monthly payments of a mortgage are €1000 and it was originated in 01/01/2006. If by 01/01/2011 5yrs of full payment have been made and are then completely discontinued for whatever reason then at 01/01/2013 the score will be 71% – not enough for repossession but a range of restrictions will apply. If little or no effort is made in subsequent years then repossession comes rapidly on the cards but otherwise ones best efforts at repaying are rewarded by fewer penalty restrictions. This is of course for fixed rate mortgages so variable ones will have a different schedule profile but the overall idea is the same.

    Sounds convoluted and don’t know how to consider multiple properties but it seems to me as a possible compromise between widespread repossession and too easy debt forgiveness.

  94. In Ireland this is compounded by the draconian, outdated and entirely inappropriate laws on personal bankruptcy, the lack of non- recourse mortgages and the effect bankruptcy judgments have on an individual’s ability to engage in business.

    So what will the extra cost of non-recourse mortgages be or like burning bondholders, it is cost free until it’s not.

    In the US, the rich are said to be big users of the strategic default option.

    As regards laws on personal bankruptcy, research shows that in US states with liberal laws on bankruptcy, banks have more restrictive credit policies.

    Ever heard of the free lunch?

  95. @MH

    “As regards laws on personal bankruptcy, research shows that in US states with liberal laws on bankruptcy, banks have more restrictive credit policies.”

    Florida allows full recourse mortgages. Florida has the highest rate of home loan default in the USA.

    More restrictive credit means the bank insists the price paid for the asset is more than it is worth. Isn’t that good for consumers? The home equity that caused the splurge in the UK and Ireland was illusory. Illusory assets are not a good thing to be counting on.

  96. EDIT: More restrictive credit means the bank insists the price paid for the asset isn’t more than it is worth.

  97. Having now read the article I have to say that it’s sufficiently vague that it’s almost meaningless, apart from the aim.

    The aim seems to be to give a free pass to everyone in negative equity on the basis that their spending power is going to be very restricted for a long time. Yes, the article talks of well over 200k mortgages in negative equity and “only” 60k in arrears in the downside scenario of 55% price drops.

    But hold on a minute. People in negative equity would always have had restricted spending power as long as they continued to pay their mortgage, wouldn’t they – unless of course they were depending on flipping or remortgaging at some stage? Frankly, I don’t fancy bailing people out because their expected ability to do a big equity withdrawal has not come true.

    On the arrears, here you get into the difficult area. Still, perhaps a better solution is to simply reform bankruptcy rather than creating complex and gameable bailout schemes, ripe for abuse.

    If you’re really broke then you get to walk away with some pain but not 12 years of horror as in the current Irish system. However, it’s hard to game a system where the best you’ll get is to walk away with little or nothing. If you have a skill and a job then you can start spending again too.

    Of course, we don’t want to make bankruptcy so easy that people in negative equity start aspiring to it, but it still seems less likely than people in negative equity aspiring to be bailed out under the current proposal.

  98. My, how the worm turns on ‘special pleading’. I see one of the names on that list (C.Gurdgiev) is someone who has recently admitted to being deep in the negative equity trap.

    So I’ll happily apply his own loudly-proclaimed libertarian ‘principles’ back at him: why should I, as someone who refused to buy into the housing bubble, now be expected to bail him out?

  99. In respect of the NAMA banks alone with figures taken from their latest reporting (some of the numbers are interpreted):

    Residential mortgages – €105bn (non-NAMA banks will bring this up to €115bn)
    Personal lending – €12bn
    Non-NAMA commercial property – €70bn
    Commercial lending – €70bn

    So NAMA is giving clarity to some land and development loans. What is suggested today is the reality of the residential mortgage lending be addressed. What about commercial property and non-NAMA propertyy (commercial is down 60% from peak and the sub-€20m or sub-€5m land and development lending is likely to be down 75-90%) – who will bear the undeclared losses on these?
    What about the €12bn in personal loans? The credit cards? The car loans? The home improvements or the Maldives holiday long forgotten? How many of these will default?
    And what about commercial lending? With GDP down 11% with a measly 1.7% on the cards next year. Does anyone think there is a commercial lending car crash waiting to happen?

    I think the article today is a worthy start to recognising the reality of another part of the banks’ loanbooks but there is more to come. Shouldn’t we be looking for a strategic comprehensive solution to the entire loanbook which as far as I can see will involve either default or multi-decade debt repayments.

  100. I for one was asked to sign the letter and declined. Below are excerpts from my emails with Stephen about the issue.

    “I cannot sign your open letter. While I applaud the intent, I believe
    that such a move would cause rather severe inequities. Put simply,
    when I moved here, I moved with the belief that I could not (and
    likely would never would) be able to afford a house at the going
    prices. As I result, I have been a renter despite the strong desire to
    own my own home (something I did in the US). Asking the state and the
    banks (which means the state yet again and both of which ultimately
    mean the taxpayer) to take a hit to help out those who didn’t have the
    self-discipline to go without something they couldn’t afford is
    absolutely unfair to those of us who did not fall for the mania of the
    market. Again, I appreciate the desire to do something to ease the
    troubles of homeowners. However it is unfair to simultaneously turn a
    blind eye towards the difficulties renters face (with another pay cut,
    I will no longer be able to afford the house I rent). Adding the
    injury of added taxes to cover your proposed bailout to that insult is
    something I cannot support.”

    and

    “… But either way, my issue is one of equity. There needs to be a balance
    between those who made bad decisions and those who didn’t and I just
    feel that things have really swung to far to the one side. It isn’t
    about concerns of promoting moral hazard, it’s about my ability to
    maintain the home I have lived in for three years and hope to stay in
    for many more until I can legitimately look to buy something
    permanent. To say that my concerns are secondary to those of
    homeowners is simply unfair, the loss of a home is the loss of a home
    regardless of who owns it.”

    There is a tradeoff between equity and efficiency. The proposal originates in a very understandable human motive and also lays claims to some efficiency gains (although the above discussion makes it clear that the extent of these are arguable). My main conflict with it, however, is that it utterly discriminates in favor of (a share) of home-owners. I do not see why this group deserves special treatment at the expense of others. So while I support anyone trying to come up with solutions, I cannot support this one.

  101. …but the remaining debts stay with the person until the end of the term….

    …and beyond for a pre-designated length of time – i.e. the debt doesn’t just vanish at the end of the term if left unpaid but is gradually forgiven over a further period with penalty restrictions still applying.

    @Jagdip

    Can all the other individual loans you mention e.g. credit cards, personal, car, holidays etc. also be lumped in together with the mortgage schedule in the scenario presented above but they retain their ability to attract additional penalty interest at a reasonable rate?

    This is getting more convoluted and I’m waiting for someone to expose the big flaw!

  102. @ zhou_enlai

    Nevada has the highest foreclosure rates.

    However it’s foolish to argue that Florida has a high default rate because of recourse loans.

    Has Vermont the lowest foreclosure rate because of recourse loans?

    Unemployment and demographics in particular the concentration of subprime mortgages are key factors.

    The point about bankruptcy laws relate to research on the ease of entrepreneurs getting finance in different US states.

    More liberal laws make small banks in particular more cautious. Hardly a surprise.

    @ Ron Davies

    So the Gang of 46 becomes the Rump of 10!

  103. “Real humans’ economic behaviour cannot be mathematically described.

    Best quote of the day!

    Rational Choice and Expected Utility theory assume that humans are all-knowing, all-seeing, can estimate probability and assign risk . . . ie: we’re Vulkans. Well we are not. We are emotional beings. Make some awful decisions!

    Capitalist market mandates an attribute known as ‘sunk cost’ in specific consumer transactions. Those debts we are discussing are in part or in whole, sunk costs. What happens to sunk costs?. I do distinguish between what cannot be paid back, and that which will not. Its the former I am concerned about.

    Why the visceral reactions? There were two parties to a mortgage and loan agreement: originator and mortgagee. So. Both are Vulkans posing as humans? No? OK, so now you enter the middle world of Behavioural Economics. You leave neo-classical – and visceral reactions outside.

    Consumers buying a property are in a high emotional state. The originator is in a somewhat similar state – pressure to perform etc. Not attempting to pull any fancy excuses for errant behaviours – just describing the situation as I experienced it.

    1 Originator: Lots of experience at this sort of thing. Has all docs (I hope!). Has Check List from Risk Department. Senior management have instructed originators to abide by Iron Law of Mortgage Origination (keeps potential defaults below 1%). Conducts a thorough Due Diligence analysis of the buyers. Has access to a data-base to cross-check appraisers report.

    If any of these nitty items are side-stepped – you SHALL end up with a bad mess. And regretabbly we have. So, the most important question to ask is: “HOW was mortgage processed and signed off?”.

    2. Appraisor: Gives appraisal value to ensure sale. Commission depends on. Moral Hazard?

    3. Buyer: High state of anxiety and emotion! May be telling porkeys? These would be detected by Due Diligence.

    Now please try to convince me that each of these persons are acting in accordance with the constructs of Rational Choice and expected utility theory. They were not. I pass.

    Questions: What is money? (if you answer that ‘it is a medium of exchange’- you’ll get an NG). Is debt money? A mentor insisted I answer these questions. That was nearly 3 years ago and I still have not got my head around the answers. Very slippery concepts. Off you go then!

    Who bears the loss: Homeowner – asset value is written down. Bank has a sunk cost problem and if homeowner has lost wage income – lower level of income stream. If bank is liquidated, new owners deal with problems. However, if the banks are nationalized – then we (taxpayers) are left with both problems. So now you know. Liquidate the banks PDQ! Oh – ECB say “No can do!”. Shucks, we are on our own with this one!

    That all folks. I said more than I wished. I shall refrain from replying to any comments.

    Brian P

  104. Guys,

    I am not an economist but an accountant so that may be why I see this in a different perspective. The government has debts yes, but it also has assets and lots of them with many generating significant income. As far as I can see this is of virtually no interest to the bond markets, certainly I have never heard it mentioned in related discussions. OK so issue shares in them to all taxpayers free and let them either pay off their negative equity or hold or sell or whatever. Either way everyone is deleveraged and therefore more likely to start spending. This addresses the saving the imprudent issue as the prudent benefit equally. Any thoughts.

  105. @finfacts

    So what will the extra cost of non-recourse mortgages be or like burning bondholders, it is cost free until it’s not.

    Do you mean ‘not burning bondholders’ here? Because I distinctly remember not burning bondholders being cost free, until it wasn’t.

  106. @MH

    I better withdraw my Florida chirp so! I took it form the preface to Joe Stiglitz’s book freefall. Better go finish the preface and reaad the book.

    I actually think this discussion should be closed. There will be no debt forgiveness of the type spoken of. The country has no spare money. Without wanting to insult Ronan Lyons and Karl Deeter, this idea is beyond pie-in-the-sky. No politician can tell you that but the fact is that the chances of debt forgiveness for those who can pay is zilch.

    What should already have happened is reform of the personal insolvency laws.

    Beyond that we need to streamline the process for forcing resolutions between borrowers and banks. Those who can’t pay, are in negative equity and getting in deeper, and who are ready to move house should be allowed to hand over the keys and get out of dodge.

    It needs to be a cheap, transparent and equitable process applied by the banks save in the case of appeal. It can’t be easy, it can’t be gameable, it can’t be a bailout.

    I think my proposal above deals with it but there may be a better way.

    In the meantime, people should be remined that there is no tooth fairy, there will be no debt forgiveness for anyone who can pay and the best thing people can do is to continue to make their mortgage repayments if they can.

  107. @andrew @eamon moran when facts change, i generally change my mind, what other choice is there? I am still against debt forgiveness in principal, and you clearly didn’t read my comments above: my support is because it will force the losses into the banks, the other alternative is to put those losses onto society general and that is a bigger mistake.

    I was on the front line calling for a fast resolution, generally it should be ‘pay or possess’, but our regulator, state, banks and every politician don’t want that so we can’t get to any position of truth on asset values and at the same time we are letting people stay in properties the cannot afford. So let the bank realise the writedown, ‘debt forgiveness’ is another word for ‘writedown’ or ‘loss’, and in this case the loss goes to the investors in the financial insitution, apportioned according to their loan book quality.

    It may turn out to be moral hazard, and it will come at a cost, but in any case – I’d rather see some damage done to holders of investment instruments first before we inflict it upon the taxpayer.

    let me make it simple: our banks are lying about thier asset values (on residential loan books), you either want to help them carry on that lie or realise it, if you prefer the latter then you possess houses (we can’t because of CCMA/Regulator/State/Banks don’t want the writedown), or in the absence of that you write down asset values accordingly. The flipside is ‘forgiveness of the debt’ to a degree to those who are holding that debt.

    @Geckko we already practice transfers all the time, it occurs via taxation – the state is a redistribution mechanism in practice. Hitting bond holders is merely having the liability side of the balance sheet brought in line with the asset side of it, unless of course you believe our assets as currently priced in the banks are priced correctly?

    @pongo this wouldn’t be a ‘free money for all in negative equity’ scheme, it would be designed for those who cannot pay their current mortgage and have been assessed to that degree, there are of course others who will never be able to pay and they probably should be repo’d.

    @DavidBurke the funny thing is, that you are paying for this already, and you’ll pay a lot more if we let it get to the point where there is nobody other than the taxpayer to foot the bill, currently we have a group of people lined up to take some of the pain, we either utilise that or we don’t.

  108. @zhou

    Would you agree with the addition in brackets:

    In the meantime, people should be remined that there is no tooth fairy, there will be no debt forgiveness for anyone who can pay and the best thing people can do is to continue to make their mortgage repayments if they can (rather than emigrate, file for bankruptcy abroad, exploit poor security, hide assets abroad, make transfers to relatives or engage in other “doubtful” practices to avoid debt repayment).

  109. Karl Deeter,

    I understand where you are coming from. But here is the rub. If you force a writedown on the asset side, equity gets written down first. Most of this equity is state owned ranging from90% plus in the case of AIB and 40% in the case of AIB. So you wipe out a good chunk of the NPRF. Then your choice is i) refill at the taxpayers expense or ii) call in the bondholders.

    Unfortunately you then confront the reality of the custom and practise operated by the ECB-no bondholder left behind.

  110. @ Adrian
    Great contributions to an excellent thread.

    ‘The state conspired with banks, estate agents the print media and supposedly ‘independent’ institutions such as the ESRI to engineer this disaster’

    More correctly, I think, the capture of the state by domestic and foreign vested interests reached unprecedented heights, behind a glossy façade of tax-driven MNC activities. Joe Lee correctly diagnosed all the weaknesses many years ago.

    As @ Jagdip says: ‘Shouldn’t we be looking for a strategic comprehensive solution to the entire loanbook which as far as I can see will involve either default or multi-decade debt repayments’

    Where is the capacity for strategic thinking ? The rot extends very far. How far can it go ?

    As you rightly say:
    ‘The IMF is not the worst case scenario — that would be a generalised LA-riot style event’.. ‘People wanting worst case scenarios should broaden their imaginations a little’.
    Yes. The consumer society is unlikely to die quietly here. We are well assimilated into I want it and I want it now.

    @ Marian
    ‘I’m sorry to bring this up in this thread, but I’m tired of seeing it here and hearing it on RTE ad nauseum. Could you please explain how NAMA is a debt forgiveness scheme for big borrowers’

    There are some good reasons why NAMA operates in secrecy. I’d say there are a whole lot more bad ones. Special structures in case the hoi polloi might be scandalised. Special discretionary arrangements for pursuance of debt ‘insofar as feasible’. Political direction. What else do you need ?

    The professionals are getting a free pass too. …As @ anonym says ‘apparently it’s the case that atrocious paperwork and shady dealing (and deliberately atrocious paperwork in the service of shady dealing) are prevalent at the height of most gigantic asset bubbles’

    Not here of course. Sure there’s no evidence at all. Move along.

  111. @Zhou
    “Without wanting to insult Ronan Lyons and Karl Deeter, ”
    I think your missing an et al there.
    More seriously, yours is one of the few comments that say : right lads, that wont work, but this might. And it might. Im not at all wedded to the solution we put forward – i am wedded to the inelucitable fact that we need to realise, in all senses, that yep, theres another hole in the ship. Too many posts here one can see the sneers dripping off the screen – not yours, so hat tip.
    BTW- the idea of this dysfunctional polity doing the sort of radical, long called for, changes you suggest ? Close to the odds of they doing our idea….And aint that saying something.

  112. Sad to say, there are major major issues with this proposal -or rather vaguely described policy. Lets understand the various rationale’s that were advanced and see if they hold water:

    A. Distributional Justice: People who made certain decisions on property deserve taypayer funds over and above those of an identical person – with the exact same income/spending habits/age/education/healthstate/behaviours- who did not make such a decision. The sole criteria for the re-distribution that they propose is the size of the negative equity that the person incurred when they bought their house.

    The program’s details are vague but if you were to do a analysis of where this money was going I would bet that the largest gains would be people who bought big homes in fancy areas.

    This is a strange criteria to use indeed to determine “need”.

    Now distributional justice is at best a fuzzy concept, but I can think of much better distrubutional criteria (poverty, incapacitation, marginal effort/contribution through work, sickness, age, etc, etc, etc). You can shape these depending on socialist vs capitalist viewpoint – are the authors proposing we developing a new ideology that values the needs of mortgage-holding property owners above everyone else?

    B. Externalities: We should spend tax money to help those in negative equity because this will have positive externalities for the rest of us because:

    1. The recipients will be freer to invest/spend creating a stimulus with positive multiplier: If this were the rationale, shouldn’t we focus taxpayer money on those with a higher marginal propensity to consume? Also, won’t 80%+ of any consumption just go on imported goods given that we’re a Small Open Economy? In terms of investment, these folks haven’t exactly proven their ability to make good investment decision? Wouldn’t the multiplier (and rate of return) be greater on, say, labour-intensive infrastructure investment projects be better?

    Of course, the total impact on consumption/investment is unclear as well because, unless C is true, we’re taxing other people and hence reducing Johnny Taxpayer’s ability to consume/invest?

    2. Freer Labour Mobility: Huh? Strikes me there are a million cheaper ways to get this. Plus don’t we have 12%+ unemployment and spare labour capacity in every area of the country?

    C. This is a free money not (Irish) taxpayer money through some (vague) ECB mechanism or because we’re merely taking it from the “banks”

    Last time I checked, Irish taxpayers are on the hook for all losses/debts incurred by the Irish banking system? If we remove this guarantee -then no one will lend the Irish banks the fund necessary to pay for this. Or are we trying to pull a fast one and try to slip this in before we plan to renege on a our guarantee for the banks?

    If its relying on european taxpayer solidarity through the ECB funding of Irish banks: This implies we will default on our borrowing from the ECB. And the Germans would go for this because??

    d. We’ve already bailed out Anglo/AIB/BOI Bondholders so its only just that we also bail out mortgage holders in negative equity.

    Huh? A very strange argument. One inequity requires us to proceed with another one – or are the authors stating that the bailout of Anglo Bondholders was justified and that our general rule is that taxpayers should fund bad investment decisions in general.

    If we accept this proposition, then there’s a bunch of candidates who would appear to have equal claims to other people’s resources? Wouldn’t those who bet on shares and lost have a claim on taxpayer funding?

    Someone stated: “Take 5 bln from the NPRF and remove tax reliefs on pensions for 18 months.”

    Yes – we could do this or we could use it to cut the waiting lists at Crumlin Children’s Hospital, or cut the marginal income tax rate, or the corporate tax for MNCs, or to provide all manner of public goods or services or massively reduce class sizes or a million other things. Isn’t the main point of economics about opportunity cost and scarcity of resources?

    I must say that I am very disappointed with this proposal. I have/had a lot of respect for the authors. I could see how a vote-mongering politician could come up with something like this- not distinterested academics/intellectuals whom one would think have efficiency/equity as their top priority.

    This has been a very dis-spiriting week indeed – with Enda Kennys performance, this proposal, the Morgan Kelly article. The alternatives to the current regime also look pretty week.

  113. More absolute nonsense and silver bullets from the “deposit seller” and his fellow travellers. I am surprised this beauty wasn’t held back for the fest. Or can we expect some real corkers this weekend.

    You want a real loser constituency? Consider all those pensioners and others (including charities, parishes etc.) who have been wiped out by the collapse in bank share prices.

    Are we really going to bail out people who are in negative equity and yet who are paying much less in servicing their mortgage than they signed up for, whilst not doing something for the devastating hard luck cases above?

  114. @Jimmy G
    If there are 100,000 households or more under water due to bad mortgage debt that qualifies as systemic risk to the banks, which “we” own. You will find I’m not in favour of cuts to the Carer’s Allowance (you can look at Cúram’s facebook page for more information).

  115. The February thread, “Expert group on managing the household-debt-crisis
    “debt forgiveness” two matches from 49 comments.

    shttp://www.irisheconomy.ie/index.php/2010/02/25/expert-group-on-managing-the-household-debt-crisis/

    Move on 9 months. this thread “debt forgiveness” 34 matches already, what will be in six months time?

  116. @ remnant

    Agree with all you say. But you must be a new boy around these parts if you are “disappointed”. These jokers are for ever producing headline grabbing silver bullets, sometimes completely and embarrassingly in error. They have developed the paradigm into a circus which culminates in a fest of economic hubris this weekend in Kilkenny.

  117. Reading through the thread and selectively ignoring the snark, it’s clear Zhou’s constructive proposal is well thought out, and could well be a better solution than we advocate, thanks Zhou.

    @Jagdip, of course you’re 100% correct, the total debt pile is a strategic issue.

    No one is suggesting there is a tooth fairy-type solution to this problem with no consequences for anyone. The point of the piece was to highlight that this is indeed an issue which should be considered. I think we did that, and I’m happy we wrote the piece as we did. As I’ve written elsewhere, if–and it’s a big if–the costs outweigh the benefits to a particular policy, we should think about implementing it. I’m open to any evidence-based constructive proposals to that end.

  118. @Brian Woods 2

    … a fest of economic hubris this weekend in Kilkenny.

    Brian, the speakers or ‘entertainers’ include some pretty smart people of international repute — Peter Schiff, one of the Austrian-school economists who predicted the crisis long before it occurred (rather than afterwards) and control fraud expert Bill Black, author of The Best Way to Rob a Bank is to Buy one.

    Sounds like quite a good show, if you ask me.

  119. @Carolus

    It sounds like a brilliant show, I will be there. The telling thing is that the last time BL did a whip around he got 48 takers, this time round he’s reduced to the few economic entertainers.

  120. @zhou
    I like your solution too.

    “Also, I am disappointed that nobody has commented on my far superior proposal of limiting recourse to the property value plus an amount calculated by reference ot the borrower’s income 🙂 . I have additional bells and whistles in mind to deal with the mechanics.”

    That may be because *my* idea is clearly superior:
    http://www.thepropertypin.com/viewtopic.php?p=326367#p326367
    “My solution was that banks could only issue recourse loans up to a maximum credit limit per individual/family unit. This would be based on tax paid. If you don’t pay tax, you clearly have no income and so you don’t get credit.” 😀

    There is also the case of the marginally in trouble. I think it makes no sense to try and foreclose if there income has dropped by an amount which makes them unable to service their mortgage. So what I propose is that pension withdrawal should be allowed tax free provided it is solely used to pay down capital on a PPR (or even on an investment?) mortgage.

    In addition, we need to accelerate debt writedown, so I would switch mortgage interest relief to being mortgage capital relief (so debt reduces quicker) and/or allow pension relief to be used to pay capital off mortgages at whatever pension relief rate is available.

    The sooner household balance sheets are restored, the better. Many are emotionally attached to their houses, so it makes sense for those that have a chance to get out of trouble for them to be afforded the opportunity to do it.

  121. Can I get a bailout from the Irish taxpayers for the Intel stock I bought in August 2000 at $63.77 a share and is now worth only $21.04?

  122. My mortgage is invalid since the institutions I entered into contract with were engaged in reckless trading and did not have legitimate claim to the money they lent me!

  123. @Zhou’s solution is essentially a flavour of a rapid bankruptcy scheme. “You’re broke, start again.”

    Ireland’s bankruptcy laws have long been described (here and elsewhere) as Dickensian so almost any half-reasonable reform would be an improvement.

    I do find it absolutely astonishing that Stephen Kinsella is now saying “Hey, that might actually be a better idea than the complex bail out scheme a bunch of us wrote up for the Irish Times”. In the one piece of snark I’ll allow myself; surely you’re joking Mr. Kinsella? Such a rapid about face makes it seem as if you hadn’t thought about this very much.

    Anyway, as always you’d have to think through the various aspects of the scheme, e.g. if you take Zhou’s scheme as currently described it might encourage people to stop working entirely to avoid option c, but I don’t get the impression that zhou has spent weeks in a committee room polishing his proposal.

    On hogan’s suggested additional elements, the pension tax relief idea is superficially interesting but (i) I have a horrid feeling that given some time and some lads in a room I could figure out a variety of complex “tax optimisation solutions” to take advantage of that one and (ii) Ireland has long suffered from excessively favourable tax treatment of property investment and this seems like another one. I mean IIRC Hogan has recently been advocating taxing pension contributions but now we should be able to pay off mortgages with favourable tax treatment, but only mortgages. That seems odd.

  124. 1. Just for the record. The authors claim the banks were “forced” into delaying repossessions earlier this year. The fact is that, until this year, AIB had not repossessed one house for over 8 years

    2. Affordability of mortgages is not usually effected by a change in the value of the underlying asset. It can be effected by rising interest rates or loss of employment income. But these always have been normal risks in taking on mortgages. Our recent rise in unemployment is not caused by the banks or their shareholders.

    3. Householders who want to trade up will find it cheaper than previously to do so. Those who wish to trade down will have lost some equity, but the much greater number of these are elderly, who have already lost great fortunes in bank shares, etc and many are very vulnerable, some suicidal and no scheme has been proposed for them

    4. The house value crash is not so much a problem for the borrowers- for reasons above- as for the banks themselves. The banks may have to recognise theoreticalor contingent losses on loans when they stop performing. That could be very serious for the banks, and ultimately the taxpayer, including mortgagees. For that reason, rescheduling mortgages is a much better option, allowing the banks to “sit” on devalued assets until they grow in value, which they undoubtedly will over the period of typical mortgages. In other words, the banks have the ability to finance these temporary losses over the loan periods, from future profits, as long as the loans are performing. it seems to me that some of our hysterical celebrity “economists” hate the banks so much that they would like to encourage defaults

  125. Hugh,

    I’m sorry if anything I’ve written gives the impression of an about face. I hold the same view as this morning, but I’m quite humble avout the quality of my knowledge, and more than happy to learn more. If I had the 100% definite solution, public debate would be unnecessary. I’ve thought about the problem, but I don’t have all the answers, far from it. I’d welcome any better ideas, and consider them with an open mind and fully. Zhou and Hogan have constructive proposals, I’m delighted to read them, because I’m sure they’re smarter than me.

  126. Here’s the condensed version of the potential solution given above in instalments. The idea is that it is a compromise between ruinous widespread repossession and uprooting of families and unpalatable debt forgiveness. People who pay as much as they can are rewarded and other taxpayers who did not buy property or suffered other types of losses see that the nominal debt stays with people for many years and is not so easily forgiven. It will also fairly quickly separate those that are likely to pay and those that are not and gives them clarity and flexibility in each case. Let’s call it DATS (Debt Assessment Test System).

    INITIAL ASSESSMENT

    Those whose mortgages originated before 01/01/2000 are assessed on the 01/01/2012, those in the years 01/01/2000 to 01/01/2005 assessed on the 01/06/2012, and those since that time are assessed on the 01/01/2013. No repossessions should be allowable before these dates.

    In assessment all payments made will be quantified and divided by what the total scheduled nominal payments should have been at the assessment date to give a percentage or score. Annual coefficients to reflect variable mortgage rates can be calculated for each year to equate fixed/variable schedule payments.

    No additional interest penalties should be considered for mortgage debt as this just compounds an already huge problem and leads to hopelessness. The proceeds of selling a house or houses prior to the assessment date can be used towards reducing the amount of the outstanding mortgage. This will either completely clear the debt or improve the score with the remaining original debt schedule following the person.

    The maximum length of time allowed before which debt is completely cleared is until the end of the original term plus an additional five years.

    INITIAL RESULTS

    Scoring below 40% will mean repossession should proceed but the actual score will dictate the standard of house provided through the social services system i.e. a score of 35% and a score of 5% will lead to very different outcomes. NAMA could play a central role in this case by providing suitable accommodation.

    Scoring above 40% allows one to remain in their house and a panel of experts devises an increasing list of penalties from 0 at 100% to fairly draconian at 40%. This sliding scale would involve restrictions in the form of access to credit, ownership of certain assets, and ability to hold down certain roles.

    ONGOING RESULTS

    At the end of each subsequent year after the initial assessment a new assessment is made on the basis of the repayment performance within the preceding year. Thus scoring higher will lift penalty restrictions in the case of those who passed the initial assessment or improve living conditions for those who failed and are in the social services system. The emphasis in this case will be on the effort made to pay and a panel of experts can decide the mechanics of this.

    ADDITIONS

    Where other types of personal debt e.g. utility bills, personal loans, credit cards are also experienced by the debtor there should be a system devised whereby these can be added to the overall mortgage debt due while retaining their ability to attract additional penalty interest (within reason) and any future losses should be shared with the issuing company e.g. ESB, MBNA etc. This aspect would need a lot of further work to assess its feasibility and the mechanics of it.

  127. @Hugh
    “That seems odd.”
    No, the mortgage capital tax-free transfer was part of my original move to universal pensions scheme. Since the sum total of people’s wealth at retirement is their property wealth and their pension wealth, I don’t see that it is odd. By the way, I was advocating taxing pension withdrawals. If you want to take your private pension and leave the country, I don’t see why you shouldn’t, after tax, be able to do that.

    I accept the points about tax gaming that goes on. I would move to a commandments based tax system – “thou shalt not game the system”. With an open court where individuals can argue their case and case law can be made.

    @Stephen Kinsella
    For my part, I doubt that very much!

    It matters less to me what the specific proposals are, more that the problem is being talked about and that something will come out of it. I don’t think this specific proposal passes the “fairness” test. I think a bankruptcy-lite mechanism could and allied with a move to stressing capital repayments would be a good move.

    Why, for instance, do banks not offer a capital only period instead of an interest only period? Yes, they would make losses on the interest, but they would end in a position of getting the original value of the loan back.

  128. Subsidies on top of paying the debts of banks!?

    Lunacy! Great idea for driving the bond rate higher, euro lower though!

    Genius!

    Not. You proposers still seem to have no understanding that the disease is the “easy” credit! The remedy is deflation. It is always inevitable, part of the credit system. Low interest rates exist because no one wants more debt. Paying off someone’s debt is creating more debt somewhere for someone. That debt again bears interest and must be paid off! Worse, you punish the prudent who avoided debt by rewarding the profligate.

    I presume this was just a test to see who was daft enough to support the idea? Like a car scrappage scheme?

  129. @ Tim Morrissey, Brian Lucey, et al

    I still don’t understand the “why” of why we should do this beyond a vague desire to help a certain type of person that we like – the sort of nice young attractive middle-class families with children that the banks used to have in their adverts. Can you or any of the advocates state rationales beyond those examined below

    1. Distributional: We’re (re-)distributing resources to people solely on the basis of decisions they made around property vs identical people. We’re basically saying we are valuing “owner/occupiers” over and above a family with exactly the same income, needs, etc who rents and/or didn’t make a certain property purchase decision.

    In other words, the taxpayer is paying to prevent “uprooting of families” only when they own their own home. Or if, say, a landlord decides not to renew a lease, should the state also intervene to ameloriate their “uprooting” (e.g. requiring people to rent or to move to a smaller house).

    2. Externalities: No one has convincingly explained the benefits to third parties:

    a: Higher Spending/Investment Simulus: Not relevant given our stimulus to import. Also, we’d get get bang for the buck by spending money on employment-intensive stimulus infrastructure investment programs or by giving it to people with a high propensity to consume (e.g. student grants :-))

    b: Labour mobility – really, when we have mass unemployment?

    3. Free Money: The only justification for this is if this proposal somehow becomes “free money” for Ireland Inc. If so, can you explain how? If Johnny Foreigner ends up paying, this requires a default?

  130. @ Remnant

    Those are fair questions and I will try to answer your points. I can only speak for the proposal I put forward in this which is purely based on pragmatism.

    I don’t think this is just a problem associated with young attractive middle class families. The personal debt problem (mostly mortgage-related) is across all of society, from vastly overpriced property in former council estates to elderly farmers investing a few bob in buy-to-let and so on. In my case also (as a renter who might buy a property reasonably soon) I would not consider myself to have a vague desire but a strong conviction that society (and the economy) will be much better off if some type of compromise is reached. For a start many families would be far more sure of where they stand and the potential options will become much clearer and this should take away a lot of the current stress (fear of unknown) which is affecting the health of adults and children alike.

    With regard to owners versus renters I think the solution I am proposing will be difficult for owners. They still have to pay at least 40% of their boom-time mortgage to stay in their house and will face many penalty restrictions unless their payments are closer to 100%. In the meantime there will be inevitable repossessions as some people will be unable to meet the 40% and property prices will drop enabling current renters to get cheaper houses or rents. Real write-downs will also not occur for many years hence in the case of the longer-term mortgages and the ‘Sword of Damocles’ effect will be there.

    With regard to ‘uprooting’, I think it is fair to say that owners are more embedded in the fabric of local society than renters – I’m thinking of GAA clubs, school committees, choirs etc. and these things are an important aspect of our society. Of course this may be considered a woolly argument !

    One of the key aspects of the DATS proposal is that people are always encouraged to pay as much as they can reasonably afford and by doing so will lesson the burden on the banks (taxpayer). In doing this no unnecessary hindrances should be placed in the debtors’ way in their own efforts to improve their future earnings. I think this combined effect will have benefits on the macro scale.

    I believe this proposal would be more transparent and more difficult to fiddle around with than some of the other suggestions I have heard here and elsewhere.

  131. @Tim
    I’m sorry to say that – for the moment at least – your whole suggestion is woolly. A “panel of experts” would decide how much you should be made to suffer if you can only pay 40% of your mortgage? A “panel of experts” can decide how hard you’re trying to pay your mortgage?

    Where do you hope to get these experts? It’s not the first time on this blog that I wonder where we’ll get a supply of Friedman’s Angels. http://www.youtube.com/watch?v=RWsx1X8PV_A

    As for your characterization of renters as less involved in the local community, that may be true of students or twenty-somethings but it isn’t true of family renters. Their kids go to the schools and GAA, they participate in local activities, etc,. etc., etc.

    Of course, family renters are probably not numerous enough to expect any political cover or financial protection. No prospect of them staying in their home if they only pay 40% of the rent. They’d be out. No moratorium, no expert panels, nothing. Out.

    Mind you, why should anyone care what’s good for them? No votes in it.

  132. @Remnant

    A. The program’s details are vague but if you were to do a analysis of where this money was going I would bet that the largest gains would be people who bought big homes in fancy areas.

    There’s no reason for this to be the case.

    B.

    B1. Also, won’t 80%+ of any consumption just go on imported goods given that we’re a Small Open Economy?

    I don’t know where you got that 80% figure from.

    B2.Freer Labour Mobility: Huh? Strikes me there are a million cheaper ways to get this. Plus don’t we have 12%+ unemployment and spare labour capacity in every area of the country?

    This was not the primary motivation and wasn’t even mentioned in the article. It is nonetheless a fact that negative equity will contribute to converting temporary unemployment into structural unemployment.

    C. This is a free money not (Irish) taxpayer money through some (vague) ECB mechanism or because we’re merely taking it from the “banks”

    I don’t know who made this argument but it wasn’t in the article.

    Someone stated: “Take 5 bln from the NPRF and remove tax reliefs on pensions for 18 months.”

    Yes – we could do this or we could use it to cut the waiting lists at Crumlin Children’s Hospital, or cut the marginal income tax rate, or the corporate tax for MNCs, or to provide all manner of public goods or services or massively reduce class sizes or a million other things. Isn’t the main point of economics about opportunity cost and scarcity of resources?

    Considering you started by saying you were going to “understand the various rationales that were advanced and see if they hold water”, it’s unaccountable how you’ve overlooked the most obvious and pressing rationale as mentioned by Karl Deeter: the money is gone, and will never be seen again.

    NAMA and the banks have the same dilemma. If they foreclose and cash in they dump their assets in a dead market. Debtors know this and have every incentive to game them. Banks have very little leverage over those in negative equity. Why do you think it is that solid foreign banks haven’t been rushing in to the Irish markets to avail of the steadily increasing margins here?

    If a house is now worth X, the foreclosure cost is Y and the debtor makes repayments to the value of X+Y+a where a is some arbitrarily small amount then the foreclosure option will cost the bank money. In fact if all those in negative equity began simply making repayments to the current value of their homes in the morning instead of the price they paid, the banks could do nothing about it without shooting themselves — and by extension us — squarely in the foot.

    The principle rationale offered is that these losses already exist and cannot be avoided by the banks in any case. Debt restructuring would at least offer clarity in addition to the other benefits mentioned.

    Much has been made of moral hazard in arguing against the idea; what about the moral hazard inherent in current arrangements? This isn’t just theoretical: have a read of this piece of advice given to someone afraid he might lose his home.

  133. @ Hugh Sheehy

    Of course it’s a woolly proposal – it’s only a back of the envelope exercise at this stage summarised in a few lines but it might provide a structured way of going about things. Not happy with 40%? then you can argue for 50 or 60% but I think you will be trying to get blood from a stone (at least while the recession lasts) if this figure is too high. Think of the public sector pay reductions in the potential IMF scenario and how this would pan out.

    I think you may have misunderstood elements of the proposal. That ‘panel of experts’ do not adjudicate on individual cases, they just initially set up a scale of restrictive penalties similar to those that apply during bankruptcy proceedings and this is fixed for all cases so no individual hands-on treatment needed except in the case where little or no attempt at payment is being made.

    With regard to the neglect of current renters (like myself) their prospects are looking good as house prices have come down dramatically and will continue further as they will be able to buy in a very different market without the Sword of Damocles over their head. My own view is that this whole property bubble is 75% the responsibility of the individuals who got involved and 25% the responsibility of the hoodwinkers and society does owe some debt to those at the base of the pyramid scheme.

    I think the alternative to a structured system such as this is unnecessary fear and what @ Bill Hobbs accurately described as ‘vehicles crashing around us in the fog’. Also how else can you incentivise people to repay as much of the mortgage as they can and lighten the taxpayer’s load?

  134. I’m still waiting to hear about the part where the lack of lenders, borrowers, etc finally causes property prices to fall to some actually reasonable figure affordable to the ordinary working stiff.

    These 67 meath acres (http://www.daft.ie/searchsale.daft?id=563030) recently drew a bid of 1 Euro (!).

    A press article mutters about community anger, and support to the foreclosed seller – perhaps a plausible narrative – But also perhaps buyers are nervously awaiting concrete info on future property taxes, which would in effect make any such acquisition a potential liability .. and if too much was paid, and prop-taxes were price-based, it could be ruinous.

    In the end I hope that the property prices will decline to realistic affordable levels, reflecting realistic rent and the incomes we will be experiencing in the coming high-tax deflation environment.

    Propping up the market to save pension funds or keeping an expensive floor under the market to woo certain voters only prolongs the inevitable – grown-ups will have to confront the grown-up consequences of their grown-up actions, to wit : lazy thinking, lack of critical analysis, and fantasy economics..

  135. Perhaps the authors of this article could enlighten me on a couple of topics
    *what level of reduction should there be in the state pension to fund this scheme?
    *which hospitals should be closed to find this scheme?
    *how many public servants should be laid off to fund this scheme?
    *which institutions of education etc etc?

  136. Been on holiday & a bit surprised about this (I can’t find a polite word to call it).

    Would foreign banks operating in Ireland be forced to participate in this debt forgiveness for mortgage holders?

    If there ever was a time to withdraw lending to Ireland it is when debt-forgiveness is being discussed. If the foreign lenders are scared off the amount of credit available for Ireland is likely to decrease.

    The suggestion is unfair & it won’t work as it will only make the banking situation even worse.

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